We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-ful lling beliefs or by...

This paper investigates the relationship between bubbles and government bailouts. Contrary to the previous literature about bailouts, it shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The...

We study a monetary model in which buyers choose search intensity and prices are considered as given in the decentralized market. In doing so, we indicate that the Friedman rule may not be optimal. Buyers' search intensity is excessively low under the rule, because their surplus is less than the...

Many authors argue that financial constraints have been tightened in several countries since the Great Recession in 2007–2009. To explain this, we construct a model in which borrowing constraints for firms are tightened as a result of mass default due to a bubble collapse. In Jermann and...

This paper uses a simple heterogeneous-agent economy model to show that redistribution of wealth among heterogeneous agents can play a significant role in business cycle dynamics and financial crises. In an economy where firms with heterogeneous productivity operate under borrowing constraints,...

In the Lagos-Wright model of money, monetary frictions alone cannot be a source of equilibrium multiplicity. However, the conclusion depends on the assumption that the agents always enter the centralized market after completing a transaction in the decentralized markets. In this paper, we...

We consider an economy where individuals face uninsurable risks to their human capital accumulation, and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that...

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two period general equilibrium model with production, we derive a decomposition formula of the welfare e ects of these taxes into insurance and...

We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless safebubble assets to circulate at a positive price. Our environment features in…nitely lived individu-als who are not subject to credit constraints but who face uninsurable idiosyncratic...